Cryptocurrencies have taken the world by storm over the past 15 months. In the process, they have divided market participants of various persuasions along political, philosophical and economic lines. Think back at the last argument you had with so much at stake.
I’ve been covering cryptocurrencies since 2013 when the market was synonymous with bitcoin and only bitcoin. I wrote back then what I write today: bitcoin is only one type of cryptocurrency, and its success/failure has no bearing on the philosophical underpinnings of the digital asset class.
In other words, if bitcoin fails, it won’t mean the end of the crypto market. Far from it, as a matter of fact.
We know today that bitcoin isn’t going away anytime soon. The “digital gold” exhibits strong price independence and non-correlation with other assets, which make for a unique long-term investment opportunity.
This brings me to the main reason why I support cryptocurrency: it takes away the power of central banks to inflate us into oblivion. Those of us on the quest for freedom know that the end goal necessitates less government intervention, not more, especially since more government has not improved our economic or financial condition but only made things worse. By changing our conception of value, cryptocurrencies such as bitcoin are helping us understand that we don’t need government to tell us what is good or what is valuable.
A Brief Primer on Central Banks
The primary function of central banks is to control the size and growth rate of the money supply. Basically, central banks control one of the most vital means of production: capital. In the process, these entities generate credit cycles, which involves the loosening and tightening of credit conditions in support of broader economic objectives.
Central banks can print money, adjust interest rates and conduct open market operations, which involve the buying and selling of government securities. They have become much more active since the financial crisis by making the global economy addicted to cheap credit. After years of record stimulus, our cheap credit addiction is finally fueling the type of inflation central bankers deem prudent (basically, 2%). The path there has taken egregious measures, not to mention a level of opacity very few decision-makers outside of authoritarian regimes can get away with.
There’s also little evidence to suggest central bank intervention will have long-term success. In credit-fueled economies, the absence of cheap credit could have adverse effects. It remains to be seen how long the U.S. Federal Reserve can support its current rate-hike cycle before having to go the other way.
Cryptocurrencies Can Break the Cycle
Bitcoin was conceived as an instrument to overcome central-bank monopoly over fiat money and its inflationary fate. As its sponsors note, its mass adoption could kill central banking as we know it. At present, this seems like a pipe dream, but consider that the past few years have seen the creation of 1,500+ cryptocurrencies, many of which dream up a future that puts more freedom and resources into the hands of its network.
Decentralized peer-to-peer technology also has the potential to pull consumers away from financial institutions that rely on government power. That’s a big reason why big bankers like Jamie Dimon have attacked cryptocurrency as a ludicrous concept. But the technology has proven too compelling for most to pass up. Most major institutions are exploring blockchain while still disavowing the crypto assets built on top of them.
The author isn’t arguing that central banks are going away anytime soon, or that cryptocurrency will replace fiat money. After all, one of the primary draws of bitcoin is its ability to be bought, held and then sold later for more fiat money. What we are saying is that crypto assets give us a way to secure our financial freedom regardless of what central bankers have to say. For this reason, it’s easy to see why they are at the heart of the anti-establishment.
Remember: inflation means the dollar you own today is less valuable than the same dollar you held last week. According to the U.S. Department of Department, U.S. dollar inflation has averaged 3.66% annually since 1945. Basically, the dollar you had in 1945 is equivalent to roughly $14 today.